"I will try to express myself in some mode of life or art as freely as I can and as wholly as I can, using for my defense the only arms I allow myself to use -- silence, exile, and cunning." -- James Joyce

Money Is Not a Claim on Anything

One of the common arguments against fractional reserve banking is that money is a claim on "real" goods and services, and that the issuance of fractional reserve notes is fraudulent because it consists in issuing more "claims" than there are goods.

This is a rather shocking doctrine for people who are supposedly followers of Mises to put forward. First of all, the distinction between "real" goods and the... what? fake good?... of money is inconsistent with subjectivism. Of course there is a difference between goods valued for their consumption, and those valued for producing goods valued for direct consumption. But does these people want to say a hammer or a forge are not "real" goods because we don't consume them directly?

Secondly, money is not a claim on anything. Mises' prose would have dripped scorn if he had encountered this idea. To see the falsity of this idea, consider an economy using only gold coins as money. One day, it is discovered that gold slowly poisons anyone who handles it or even keeps it near. Obviously, gold will cease to be money, and its owners will no longer be able to "claim" any other good with it. Or think of a boycott: if people decide they really don't like you, and no one will sell you anything, you can have a billion dollars but not be able to "claim" a cup of coffee.

8 comments:

"One of the common arguments against fractional reserve banking is that money is a claim on "real" goods and services, and that the issuance of fractional reserve notes is fraudulent because it consists in issuing more 'claims' than there are goods."

"Mises' prose would have dripped scorn if he had encountered this idea."

Indeed it did....

"On the other hand, arguments of considerable weight may be urged in favor of including all money substitutes without exception in the single concept of money. It may be pointed out, for instance, that the significance of perfectly secure and liquid claims to money is quite different from that of claims to other economic goods; that whereas a claim on a commodity must sooner or later be liquidated, this is not necessarily true of claims to money. Such claims may pass from hand to hand for indefinite periods and so take the place of money without any attempt being made to liquidate them. It may be pointed out that those who require money will be quite satisfied with such claims as these, and that those who wish to spend money will find that these claims answer their purpose just as well; and that consequently the supply of money substitutes must be reckoned in with that of money, and the demand for them with the demand for money. It may further be pointed out that whereas it is impossible to satisfy an increase in the demand, say, for bread by issuing more breadtickets without adding to the actual supply of bread itself, it is perfectly possible to satisfy an increased demand for money by just such a process as this. It may be argued, in brief, that money substitutes have certain peculiarities of which account is best taken by including them in the concept of money."- "Theory of Money and Credit" Part 1 Chapter 3 section 1.

In Mises the word "claim" means something narrower than it means today. As far as I can tell he uses it to mean that a person has a legal right to something.

One of the common arguments against fractional reserve banking is that money is a claim on "real" goods and services, and that the issuance of fractional reserve notes is fraudulent because it consists in issuing more "claims" than there are goods.

Whoa, danger Will Robinson!

Gene, I am not denying that maybe somebody on the internet said the above, but that is NOT the position that Block, Hulsmann, et al. take in their paper on this.

The better 100% reservist claim is that FRB implies multiple claims on the same unit of money.

So, say what you will about this claim, but it's not treating money itself as a claim, and it's not saying money is a fake good as opposed to everything else.

"money is a claim on "real" goods and services, and that the issuance of fractional reserve notes is fraudulent because it consists in issuing more "claims" than there are goods"

You say this is common but I seriously don't recall hearing it before (maybe I have, but rejected it and thus have forgotten). Granted, I don't cruise the econosphere as much as in the past, neither do I get into as many economic debates as I have in the past, but I still don't recall seeing this, at least not enough to call it "common".

Now I have heard it said that money substitutes are claims or titles to money, and that fiduciary media is merely the creation of more titles or claims to the same existing stock of money, but that's not saying the same thing, so I doubt that's what you're talking about.

Admittedly, my opinion on fractional reserve banking has changed many times over the years (I'm now settled on what I think will be my final position), I've always looked at money in a very Misesian way, which is to say that money is merely a good that is valued for its use in exchange (the generally accepted good for this purpose). It's not a claim to anything any more than a shoe (or any other consumer good) is a claim to money.

This is a little outside the scope of economics (it's more in the realm of rights theory or legal theory), but when I hear the term "claim" used in this context, the idea of claim rights often pops into my head. However, if that's what they're implying by "claim", then that would essentially mean that the other party is obligated to trade with you just because you have money. That's obviously wrong. I don't know, maybe they mean something else, but that's how I would read it.

"money is a claim on "real" goods and services, and that the issuance of fractional reserve notes is fraudulent because it consists in issuing more "claims" than there are goods"

You say this is common but I seriously don't recall hearing it before (maybe I have, but rejected it and thus have forgotten). Granted, I don't cruise the econosphere as much as in the past, neither do I get into as many economic debates as I have in the past, but I still don't recall seeing this, at least not enough to call it "common".

Now I have heard it said that money substitutes are claims or titles to money, and that fiduciary media is merely the creation of more titles or claims to the same existing stock of money, but that's not saying the same thing, so I doubt that's what you're talking about.

Admittedly, my opinion on fractional reserve banking has changed many times over the years (I'm now settled on what I think will be my final position), I've always looked at money in a very Misesian way, which is to say that money is merely a good that is valued for its use in exchange (the generally accepted good for this purpose). It's not a claim to anything any more than a shoe (or any other consumer good) is a claim to money.

This is a little outside the scope of economics (it's more in the realm of rights theory or legal theory), but when I hear the term "claim" used in this context, the idea of claim rights often pops into my head. However, if that's what they're implying by "claim", then that would essentially mean that the other party is obligated to trade with you just because you have money. That's obviously wrong. I don't know, maybe they mean something else, but that's how I would read it.

I guess that I should add something to that last bit that I talked about regarding claim rights, and that is this: it would be absurd for money itself to have any rights at all, such that we can say it is a claim.